Socio-Economics & History Commentary

My thoughts exactly. Fiat currencies are in trouble. All the major currencies: USD, EUD, JPY, UKP… look shaky. Quantitative Easing and competitive devaluations are going to lead the world to a monetary meltdown.

The Gold Report interviews Charles Oliver and Jamie Horvat :On the global stage of currency devaluation and debasement, the reasons for owning gold seem obvious. But have you ever stopped to consider the derivative market? According to Charles Oliver and Jamie Horvat, both senior portfolio managers at Sprott Asset Management, “The impact of the derivatives has yet to express itself.” In this exclusive interview with The Gold Report, Charles and Jamie explain how gold will react in the New Financial (dis)Order. Both foresee $2,000 gold in the next three years and, ultimately, “significant” hyperinflation on a global scale over the next decade.
The Gold Report: Jamie and Charles, on your site you’ve posted a recently updated report, “Reasons to Own Gold.” In it you say that the impact of the derivatives has yet to express itself. Can you explain that for our readers?

Charles Oliver: There are many reasons to own gold. I think one of the biggest ones is the actual devaluation and debasement of currencies. Having said that, one of the lesser-known ones is the derivative market; if you look at the derivative market on a global basis, it is absolutely enormous.

And the downfall of the financial system last year in part was the fact that many of the banks in the financial system in the U.S. and around the world had a capital base that was leveraged up 30 times or more on their balance sheet. The derivatives market is hundreds of trillions of dollars. When you look at that relative to the capital base of the whole financial system, the whole financial system gets dwarfed.

So, in periods of volatility, you can have some huge swings in some of these instruments. Some of these instruments may be off balance sheets, and there’s certainly an element of risk should some of these need to be unwound.

Jamie Horvat: We’re in a deleveraging process now and we need to get our personal savings rate back in line, as well as our personal balance sheets and the banking balance sheets. When you have that leverage you get less lending. You need to continue with that growth; so, as a result of all of that, we’re seeing governments move to quantitative easing, which is printing money and trying to force money into the system and force spending. Then what happens is currency is debased against all hard assets; and gold, as the ultimate store of value and a hard asset class in an exchange of money, over time reacts to that environment. It will have a positive bias going forward.

TGR: We read a lot about U.S. dollar devaluation and expected worldwide inflation. Why hasn’t gold gone over $1,000?

CO: That’s an excellent question. My own personal viewpoint is that today it should be at $2,000 an ounce, but it’s not. I think that sometimes these things take a long time to work their way out. For example, look at something like Freddie Mac and Fannie Mae. Last year they basically fell out of bed. There were people shouting out very loudly four to five years before that these companies were effectively bankrupt and insolvent. It just took a long period of time for the valuations to work their way out. In the case of gold, I do believe that it will be higher, but sometimes you’ve just got to be patient and wait for these things to unfold.

JH: The other thing we’ve been witnessing is the battle between deflation vs. inflation. People in the deflation camp think we’re going into another Great Depression, the Dow is going to 1000 points and the only thing you should hold is cash, as the global economy will continue to shrink.

Since we have come off the gold standard—and the reason I believe we will never go back to the gold standard—governments have used quantitative easing or the expansion of money supply to reflate the system. We’re going through one of those periods again where they print massive amounts of money and debase currencies vs. hard assets, in an attempt to reflate the system. I believe we are in a bottoming phase in the market; but we may retest the lows. The markets will continue to move sideways and be volatile as consumers continue to save and balance sheets are slowly repaired. Governments will continue to print and throw money into the system to expand the monetary supply and reflate the system. As you do that, you simply debase currencies.

So, you have this short-term fight between deflation and inflation similar to the sideways moving markets of 1973 – 1976. Gold moved from $33 an ounce to $38 to $180 or so, and in that sideways, volatile market from ’73 to ’76, it was knocked back down to around $100. Unfortunately, the end result of the quantitative easing resulted in stagflation. And that set up for the euphoric run of gold into the $800 range in the early ’80s.

TGR: So would we expect to see something like that again, where gold will cross, and continue to trade, above $1,000? Or would we expect it to cross $1,000, spike and then come back down into that $900 range again?

CO: I don’t think $1,000 is a magical number; it is a round number, so people look at it. But as I said, my own personal viewpoint is that gold will go through $2,000. I think there will be a spike at some point in the future, but I don’t know how high that spike will be. I’ve heard people talk about $5,000, $10,000—I’ve even heard some numbers higher than that—and I can see the potential spike going to such levels. It’s not a forecast at this point in time; I will keep a conservative call of $2,000 in the next three years, which is what I have been saying for a while. But, yes, I expect the spike will likely be significantly higher than that.
….. CO: ….. There will be a huge expansion of the monetary base probably over the next decade from a number of governments on this planet, and there will be a significant amount of inflation that occurs during the next decade. We do believe that hyperinflation is going to occur, and it will be quite significant.

So, I think in the next decade you’ve got to put it into a relative situation. I think the long-term norm price for gold will actually probably be well over $1,000 when we look back 5 to 10 years from now.

TGR: When you say hyperinflation will occur, are you expecting that to be worldwide or isolated as it is now while the major countries look at a large inflation period?

CO: I believe that hyperinflation is probably going to be on a large global scale, as most of the countries around the world competitively devalue their currencies. But it’s a fact of life right now as the quantitative easing is going on, and in this type of situation, you are going to get significant inflationary impacts.

TGR: Once we go into stagflation or hyperinflation, I’m going to guess that it makes sense to be holding gold bullion.

CO: Gold bullion or assets that hold their value against inflation. And the stock market, funnily enough, can act as an inflation hedge. In fact, if you look at a lot of the studies, the stock market has been one of the best ways to protect your assets against the ravages of inflation.
…. TGR: Since last November and December, the gold majors have had quite a run up. Would we expect to see any more significant appreciation in the major gold equities?

CO: The simple answer is yes, because I believe the price of gold is going higher. So, I think many of these companies will benefit from increasing earnings and cash flow. Having said that, being the largest gold producer in the world is not a good thing because it’s very hard to grow when you’re at the top. In fact, most of the big guys, they’re just doing mergers and acquisitions to maintain their current level. I believe that on a long-term basis, the best value and growth really comes from the smaller- and mid-cap sector of a well-diversified portfolio of gold companies.
….. TGR: Following the guidelines you’ve just outlined, do you have any companies in that small- and mid-cap sector that you’re looking at that you can share with our readers?

CO:In the juniors that are currently producing is a company like Wesdome, which is in Quebec. In Canada we also have Rainy River Resources Ltd. (TSX.V:RR) and Detour Gold (TSX:DGC), which are multimillion-ounce deposits currently undergoing studies. Another producer in the junior area in Canada would be San Gold Corporation (TSX.V:SGR).
…… CO:In terms of the larger producers, some of the names that we have on our top-10 would be companies like IAMGOLD, Goldcorp (TSX:G) (NYSE:GG), Kinross Gold Corporation (K.TO) (NYSE:KGC)—we like all those names. In the slightly smaller areas in the development stages—and Jamie mentioned some of them—Osisko is going to be bringing on a mine in Quebec next year. Lake Shore Gold is ramping up right now. Allied Nevada just commenced commercial production.
….TGR: During 2008 you increased your bullion percentage, but I see right now from fund stats that bullion is at 5%.

CO: As we all know, the market was horrible last year. Gold stocks were being treated like any other stock; they were, in fact, probably being treated worse. So we felt that bullion was probably better, and increased the bullion weighting. We actually ramped up bullion from single digits to about 20% when we peaked in November, and that was because we liked the defensive nature of bullion. In retrospect, the bullion held up much better than the stocks, so it was a good thing to do.

As we looked at the valuations last fall, we said, “You know what? These stocks are so cheap it’s ridiculous,” and we started to reduce our position in bullion and redivest into the market. If you look at what’s happened since that point in time, it’s been a good call. We’ve taken our bullion down to about 5% of the fund, and if you look at the stocks, year-to-date, we’re up 50%. If you look at gold bullion itself, in U.S. dollars, it’s up 5% to 10%. In Canadian dollars, I think it’s actually flat to down.

TGR: Well, that turned out to be a brilliant move. Let’s talk silver. Many people are saying silver is really going to run up faster than gold due to its increased volatility. Do you have any thoughts on silver, and is it a counter-hedge inflation play like gold?

JH: We like silver. We expect silver to move with the gold price. Obviously, silver is often viewed as poor man’s gold. Basically, it’s easier to buy in smaller quantities because it’s cheaper by the ounce and it’s easier to store for the smaller investor.

If we want to look at a cycle and break it up into thirds, during the first two-thirds of a gold cycle, as we see it, silver largely trades as an industrial commodity. But in the last one-third of a cycle, it tends to play catch-up to the gold price and close that silver-to-gold ratio. So, historically, if you go back to 1971 when gold really came off the gold standard and you look at that silver-to-gold ratio, the median has been about 55- or 56-to-1. If you go back to the 1980s, it’s hovered around 65- or 66-to-1. We got as high as, I believe, 81- or 82-to-1 in that gold-to-silver ratio, and now we’re back down to that 65-to-1 range. So, it depends on your viewpoint of how much movement you see in the silver price going forward. As we see the precious metals or gold price appreciate, we obviously expect silver to move along with that.

TGR: In the last third you would expect it to move faster than gold, but it would really be more of a spike?

CO: If you look at what’s happened in the last six months, silver has way outperformed gold. And I would say it’s now sort of getting to that point where it’s pretty close to fair value with gold under the models we’ve been running. So I am almost indifferent to owning either gold or silver right now, but silver’s momentum from the last six months is probably still with it somewhat. So, it could overshoot to the downside, but, again, I think I am largely indifferent at this current level.

TGR: Are there any other observations you’d like to convey to our readers who are precious metals investors, as we look across 2009?
CO: Last year was very tough—it really took a toll on all of us. I’ve got scars on my back to prove it still. What I want to say is continue to believe in that higher gold price because that it is going to come. I am still convinced of that. Keep the faith.

JH: I was going to make a comment along similar lines. You know there were a lot of people who, I think, were in a very similar cycle from 1965 to 1984. We’re experiencing that again, and we’re in the ’73 – ’76 volatile sideways market. A lot of people made significant money from that first gold move from $35 to over $180 an ounce. And then a lot of people lost the faith during the quantitative-easing phase in the sideways volatile market and got squeezed out of gold. Whether you believe in this conspiracy theory or not, gold was pushed down to $100—or just below a $100—an ounce and missed that last euphoric run from ’76 to the early ’80s.

So, as Charles said, I would keep the faith; don’t lose sight of the larger picture. Don’t lose sight of the quantitative easing and the debasement of currencies versus hard assets and real things, and you will do well going forward.

Disclaimer – I am not a financial advisor. This is not an advice to buy, sell or hold any stocks or bonds or any precious metals.

Judge Andrew Napolitano says: the players in Bank of America’s acquisition of Merrill Lynch should all be prosecuted for defrauding the shareholders of Bank of America…… Let us hope this not go away fast and the truth comes out.

Henry L. Niman of Recombinomics raises his concerns on the spread and mutation of A/H1N1 in the southern hemisphere. It is beginning to look like 1918 Spanish Flu all over again, crap!

Some hospitals began to strengthen measures, including the case of Posadas Hospital, one of the largest hospitals in the province of Buenos Aires that concentrates a large number of internees from the flu. Through a press release, the hospital reported that it declared a state of emergency by the Institution that “all staff will be available to the agency needs to be addressed” after the epidemic of influenza A.

In addition, the Posadas created through Resolution No. 640/09 an Internal Crisis Committee itself, with the aim of ensuring compliance and monitoring of the actions that the hospital must develop to deal with the situation posed by an outbreak of Influenza A .

Meanwhile, health authorities in Buenos Aires and Buenos Aires have some alternatives to strengthen the system, including the use of military hospital in Campo de Mayo, the release of bed in the hospital’s intensive care Malvinas Argentinas, the installation of sanitary units in campaign Buenos Aires and mobile primary care close to railway stations and Eleven Constitution.

The above translation describes the declaration of a medical emergency in Buenos Aires. The Buenos Aires Ministry of Health website lists15 confirmed fatalities, 180 confirmed cases, and 559 suspect cases as of Friday (see Buenos Aires map), but media reports suggest the actual number of cases is higher. Recent reports out of Argentina also described the rapid declineof relative young patients (15-50), with descriptions similar to those used to describe dying patients in 1918. In addition, there has been an outbreak of H1N1 at a pig farm northwest of Buenos Aires (see map).

The sudden jump in cases and fatalities are cause for concern. In the country the number of confirmed fatal cases rose to 27, but there are reports of 15 more fatalities that are suspect. There have also been reports of travelers from Argentina testing positive at airport checks in multiple countries. These travelers should provide multiple samples for sequencing studies to determine if there have been changes in the virus.

Recently PB2 E627K was reported in a traveler from the United States. However, the sequence suggested the change was acquired in China. Although the E627K was present in the original samples and confirmed in the initial clone, and subsequent sub-clone had reverted back to the wild type sequence, raising concerns that some key changes may not be stable under certain culture conditions, and important changes could be lost especially if the virus is cultured in chicken eggs, which could select against important changes associated with adaptation to human hosts.

Therefore, analysis by multiple labs of these sequences would be useful. The flu season is just beginning in the southern hemisphere, providing a favorable environment for rapid adaptive changes. The movement of a swine H1N1 into a human host parallels the 1918 pandemic, which also was associated with mild infections in the later spring, followed by a much more virulent and lethal H1N1 in the fall.

The rapid developments in Buenos Aires bear close scrutiny and active sequence analysis as H1N1 increases its gene pool transmitting through human hosts. Many countries worldwide, including those in the southern hemisphere are experiencing explosive growth, and the developments in Buenos Aires may signal a new wave of Pandemic H1N1.

Like genetically modified (GM) food, this is a stupid idea. There are just too many of these smart alacky scientists who think they can control nature. They think they understand all the ramifications far into the future. Remember DDT? See: Doctors Warn: Avoid Genetically Modified Food also.

Newsweek reports :Aedes Aegypti is a tricky enemy with a dangerous weakness for travel. Unlike other mosquitoes, it can survive the cold and thrives on city life. The increase of international trade and the accelerating pace of urbanization have broadened its horizon with grim consequences. The disease it carries, dengue fever—debilitating and sometimes lethal—is spreading fast. More than 100 million people in 100 countries are afflicted every year. Fatality rates can top 20 percent. There is no vaccine, no cure and no solution—none, at least, that conventional medicine can offer.

A new strategy involves a subtle reconfiguring of the bug’s DNA. Scientists working in labs near Oxford have devised a genetic modification that sterilizes the male Aedes, transforming the critter into his own worst enemy. He can still mate—but he can’t breed. Any offspring dies before becoming fully developed. The idea is to release a huge, all-conquering swarm of the doctored insects into the wild, let them find partners among the native females and wait for the mosquito population to decline. Preliminary trials, looking at both safety and effectiveness, have already taken place in Malaysia. Within a few years, the Franken-insects could be airborne.

The idea of GM mosquitoes was first floated 20 years ago. But it’s only recently gained the support of mainstream health officials. The Bill and Melinda Gates Foundation has invested $38 million into the research. In May, experts from around the world gathered in Geneva for a meeting sponsored by the World Health Organization to discuss progress and develop global guidelines for testing. Some environmental groups are alarmed at the development, and a confrontation looks certain. This is one they may lose. Unlike GM crops, whose benefits have more often gone to farmers, GM insects address a global health problem that causes great human suffering and death.

The practice of displacing pests with sterile mates has been common practice for 50 years. Every week, Guatemala, Mexico and the U.S. irradiate 2 billion male Mediterranean fruit flies before releasing them to search out mates. What’s new, of course, is the use of genetic manipulation instead of irradiation, which tends to leave Aedes too weak to pursue females. By slipping a single gene known as OX513, a composite partly derived from coral, into its DNA, British scientists believe they can doom any progeny beyond the larva stage.

To an eco-aware generation, already fearful of genetically modified food, any tinkering with the world’s delicately balanced ecosystems is unacceptable. “The inherent arrogance of believing that you can control the outcome is outrageous,” says Gillian Madill, a genetic-technologies campaigner at Friends of the Earth in Washington. Besides, the argument goes, malaria is already both preventable and curable without recourse to bolder and more risky tactics. A battery of effective drugs, notably artemisinin, is now available, and aid agencies have had success with bed nets drenched in insecticide.